A Horse of a Different Color –
In the late 1990s the retail trader came into being with the advent of online trading and discount brokers. It wasn’t long before the lure of the new-found freedom and exaggerated claims pulled many would-be traders into the market to make their fortune with the magic of Day Trading. Without any education or training, the early fortune seekers soon learned that magic is an illusion and reality a stern teacher.
Seeing day traders sitting in front of six or eight computer screens all day trading Stocks with large sums of money to capture pennies per trade over and over again throughout the day convinced me that the individual trader sitting at home was not going to be able to compete with the professionals. Without the institutional-grade platforms and the instantaneous access to market research, the individual traders of the world are at a distinct disadvantage. And, the amount of capital needed to make Day Trading Stocks successful put the retail trader way too far out on the risk curve, not even considering the lack of timely data with which to trade effectively in a very fast-moving market.
The problem I found with Day Trading Stocks was the cumbersome, capital intensive nature of the process, with very little control over the outcome. Now, you can say that about any trading method or life in general, for that matter, but to be more specific, I mean:
- With market makers controlling a lot of the order flow and the advent of High Frequency Trading (HFT) by computers running sophisticated algorithms, individual traders are put in a very precarious position trying to compete with the professionals.
- Because of that new reality, traditional order flow and volume analysis (think Level 2 Quotes) has been compromised, relegating traders to price action alone, which puts the individual trader behind the curve in being able to execute trades in a timely manner. By the time I saw an entry point and set up the trade, the market had moved away from where I wanted to get in. Worse yet, I would execute a trade and then suddenly the market would move against me and hit my stop order – very frustrating.
- The process of finding the right stocks to trade under the right circumstances (gaps, breakouts, buying/selling pressure, etc.….) is a full-time job in itself with very little reliability, making the odds of being in the right place at the right time very low. And, individual stock event risk can cause havoc to the best laid plans and complicates any strategy.
- Buying and Shorting Stocks and the use of margin also complicate the process, making it more difficult to manage. Commission expense can add up quickly and Bid/Ask Spreads can be harder to overcome. Capital requirements are higher than for other Methods for the same return on investment, and the Pattern Day Trading rule stipulates that you must have $25,000 or more in your account to day trade stocks. To make it work, the professionals trade with many times that amount.
- Unless you want to become a professional day trader (see Note 1, if you do), the amount of time and intensity you have to devote to day trading Stocks makes it counterproductive for the individual wealth builder. By diversifying your Wealth Building Plan by Style and Method, your job is to manage the different parts of your plan; so, getting involved with the all-consuming activity of day trading stocks will actually prevent you from achieving long-term success.
A word about Day Trading Stocks using Options: The same problems exist as with trading the stocks themselves, with one benefit and several additional complications. The only benefit I found trying to use Options to day trade was the lower capital required, which reduced risk and increased return on investment, although you still had to adhere to the Pattern Day Trading rules and trade multiple contracts, making commissions a significant cost. To add to that, you must be very selective in what Options you use because decreasing Time Value and wider Bid/Ask Spreads act against you, diminishing your returns and making entries and exits harder to achieve at a profit. Options are much more productive when used in Swing Trading strategies.
Pick Your Horse Carefully,
Your Research & Development Coordinator
If you’re new to all this and would like to become a self-directed wealth builder, get to know all about Education – The Path to Independent Wealth Management, which will set you on the path to creating your Wealth Building Plan the right way. Then, Sign Up in the Right Sidebar to get my quick-start, auto e-mail to light the way to Navigating The Diversified Trader and the easiest way to get started managing your own money.
Note 1: For those of you who would like to make Day Trading Stocks a career or at least learn how to do it, know that the path to success has a rather long learning curve. I’ve mentioned the challenges earlier, and if you can overcome them and learn from someone who’s made the method a career themselves, you have a chance to be consistent and make a living. Dedication to the task, training, and a lot of work will get you there.
I’ve left Day Trading Stocks out of self-directed wealth building for the specific reason that it’s a career in itself and doesn’t lend itself to people wanting to get control of their financial future and at the same time live their own lifestyle.
If there are enough people who want to make Day Trading Stocks and/or Options a part of their life, we could start a whole section devoted to that prospect.